Risk of Oz recession flagged for 2014

The Australian mining boom is expected to peak next year. Photo / Thinkstock

Australia could face a recession within two years unless the dollar and interest rates fall and major labour market reforms are introduced, a leading economist warns.

Saxo Bank chief economist Steen Jakobsen warns that with the mining investment boom expected to peak in 2013, Australian authorities need to do more to ensure other sectors of the economy can pick up the slack.

He fears if no action is taken, Australians could be staring at a recession in 2014.

"You have an excellent starting point, you have the ability to both fiscally and monetarily support and mitigate the effects of this slowdown," the prominent Copenhagen-based economist said.

"If nothing happens, if we have a political vacuum leading to nothing being done next year and the price [of the Australian dollar] remains above where it needs to be then, yes, absolutely a recession is possible."

Greater workplace flexibility and the abolition of some indirect taxes are necessary to reduce unit costs and making businesses more competitive, Jakobsen said, with a federal election due in the second half of 2013, he knows action on that front is unlikely.

"2013 is a huge year in terms of the decisions that need to be taken but there will be a political vacuum until the election is held, which I think is a wasted opportunity," he said.

So he said the heavy lifting will fall to the Reserve Bank of Australia (RBA), which will need to slash the cash rate to stimulate the economy.

"I think we will have a huge drop in GDP [gross domestic product] in early 2013, everything being equal, but it can be mitigated by an aggressive RBA," he said.